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The fourth quarter of 2008 was a horrible time to launch a fund. But that's when co-managers Charles de Vaulx and Chuck de Lardemelle rolled out
IVA Worldwide
(ticker: IVWAX). Even though the financial markets were melting down, the duo posted a 2.82% return in that quarter, besting the performance of the average fund in their Morningstar category by more than 17 percentage points.

Their go-anywhere fund, run from New York, has produced excellent long-term results. Since inception, it's posted annual returns of 10.55%, versus 5.54% for its category and better than 97% of its peers. Over the past year, the fund has had a tougher time, up only 2.93%, partly the result of being underweight the U.S. and having some disappointing stocks, including
Hewlett-Packardhpq -2.3514851485148514%HP Inc.U.S.: NYSEUSD15.78
-0.38-2.3514851485148514%
/Date(1481321013736-0600)/
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:
9778564AFTER HOURSUSD15.76
-0.02-0.1267427122940431%
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:
86544
P/E Ratio
11.112676056338028Market Cap
27647755520.191
Dividend Yield
3.3637515842839036% Rev. per Employee
168077More quote details and news »hpqinYour ValueYour ChangeShort position
(HPQ) and
Dell
(Dell).

De Vaulx and de Lardemelle, natives of France, remain cautious on stocks and concerned about the global economic outlook, though they do see some good opportunities with certain U.S. companies, such as
Berkshire Hathawaybrka 0.4570105417098288%Berkshire Hathaway Inc. Cl BU.S.: NYSEUSD164.86
0.750.4570105417098288%
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:
3622674AFTER HOURSUSD164.86
%
Volume (Delayed 15m)
:
265209
P/E Ratio
17.470090179829814Market Cap
404751032106.033
Dividend Yield
N/ARev. per Employee
657257More quote details and news »brkainYour ValueYour ChangeShort position
(BRK/A). Other holdings include a few high-yield corporate bonds and gold. Both the global fund and
IVA International
(IVIOX), which they also run, are closed to new investors. De Vaulx, 50, and de Lardemelle, 39, both of whom previously worked for famed investor Jean-Marie Eveillard advising the First Eagle Funds, oversee nearly $17 billion at their own firm. Barron's spoke with them recently at their offices in midtown Manhattan.

"Within equities there are pockets that are attractive, and the main pocket is in some high-quality U.S. names." —Chuck de Lardemelle (R); Charles de Vaulx is at left.
Jordan Hollender for Barron's

Barron's:What's your assessment of the euro zone?

De Vaulx: For many years, we've felt that the euro zone was a bizarre construction in the sense that all these countries that were put together under the same umbrella were at very different stages of their economic development and at very different levels of competitiveness. One way we've expressed our skepticism towards the euro zone for quite a while now is being extensively hedged on the euro. We've upped our hedge from 50% last November of whatever we own in terms of stocks or bonds in the euro zone to 65% now.

How will this play out?

De Vaulx: Though we believe that the euro zone is a not a natural construct, we also believe, over the short to medium term, that the political and business elites are very attached to the European project, and so our premise is that the policymakers will do what it takes to preserve the euro zone. That may mean permanently or temporarily allowing Greece and maybe Portugal to leave, but we think Spain and Italy will remain in the euro zone. We understand why the Germans are not willing to take out the bazooka the way the Americans did in the fall of '08. But when push comes to shove, the Germans will do what they have to do, and they will allow, for instance, a lot more money printing. From an investing standpoint, what investors may not realize is that a lot of European-based companies are not necessarily that Eurocentric. So because European markets have come down a lot more than some other markets, stock-picking is still possible within Europe, though some companies have done well lately. But there are many companies that are not that Eurocentric like
Nestlé
(NESN.Switzerland),
Totaltot 0.32653061224489793%Total S.A. ADRU.S.: NYSEUSD49.16
0.160.32653061224489793%
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:
2021809AFTER HOURSUSD48.9532
-0.2068-0.42066720911310007%
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:
26949
P/E Ratio
29.22189859121441Market Cap
123193378237.003
Dividend Yield
5.33613506916192% Rev. per Employee
1282300More quote details and news »totinYour ValueYour ChangeShort position
(TOT) or
SodexoSW.FR 2.1754064575223264%Sodexo S.A. ADRU.S.: OTCUSD22.31
0.4752.1754064575223264%
/Date(1481325601000-0600)/
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:
4805
P/E Ratio
24.347920986576447Market Cap
16852612768.1374
Dividend Yield
2.2082832810398925% Rev. per Employee
52615.4More quote details and news »SW.FRinYour ValueYour ChangeShort position
(SW.France). Sodexo, which we also own, has a huge part of its earnings and revenues here in America. So it's worth doing stock-picking in Europe, despite the problems there. We have noticed that European banks have come down a lot in price.

Is there any good value in that sector?

De Vaulx: Warren Buffett said recently that, unfortunately, most European banks remain grossly undercapitalized, unlike American banks, which were forced to recapitalize early in 2009. As a result of being undercapitalized, many of those European banks are just not safe enough for us to consider as investments. We built a small position late last year in
UBSubs -3.005780346820809%UBS Group AGU.S.: NYSEUSD16.78
-0.52-3.005780346820809%
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:
2733280AFTER HOURSUSD16.86
0.080.4767580452920143%
Volume (Delayed 15m)
:
P/E Ratio
18.23913043478261Market Cap
67500358886.4713
Dividend Yield
1.46958856928146% Rev. per Employee
617331More quote details and news »ubsinYour ValueYour ChangeShort position
(UBS) in Switzerland. It has not worked out yet. We picked that company because we believe it's adequately capitalized and that the value of the private wealth management business is not well realized.

How have you have positioned your portfolios?

De Vaulx: Our portfolio today is even slightly more defensive than it was a year ago when 70%-72% of out holdings were equities, compared with about 65% equities in our global fund today. Even though many stocks world-wide have come down, obviously a lot more outside the U.S. than in the U.S., the high-quality stuff, by and large, has done well and the bad stuff has not, and we are not eager to buy too many of those names. The economic outlook seems even bleaker than it did a year ago. Hence, we feel that even more caution is warranted. We also worry about the sustainability of corporate profit margins, which are as high as ever in many instances.

Where do you see value in stocks?

De Vaulx: By and large, we don't believe that equities are cheap enough today, especially with a global economic outlook that is not the rosiest. So we don't think equities are cheap enough to deliver returns of, say, 7%-10% a year. Equities may only deliver returns of 4%-6% in nominal terms for the next four to six years. So that's uncomfortable, but then again, what are the alternatives? Cash yields less than nothing, if you adjust for inflation. Ten-year U.S. Treasuries may yield 1.5%, but the implied inflation that's baked into the price of 10-year TIPs [Treasury Inflation Protected Securities] is about 2% a year. Owning 10-year Treasuries seems like a pretty good way to grow poor over time, so that's the trade-off because many stocks do not necessarily offer the margin of safety we typically insist upon.

De Lardemelle: Within equities there are pockets that are attractive, and the main pocket is in some high-quality U.S. names because we believe there is no chance for deflation in the U.S. So that is obviously supportive of equities long-term.
Applied Materialsamat -1.1005808621216753%Applied Materials Inc.U.S.: NasdaqUSD32.35
-0.36-1.1005808621216753%
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:
10064465AFTER HOURSUSD32.35
%
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:
P/E Ratio
20.737179487179485Market Cap
35356043155.9198
Dividend Yield
1.2364760432766615% Rev. per Employee
698387More quote details and news »amatinYour ValueYour ChangeShort position
(AMAT), Berkshire Hathaway,
Expeditors International of Washingtonexpd -1.9698314108251997%Expeditors International of Washington Inc.U.S.: NasdaqUSD55.24
-1.11-1.9698314108251997%
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:
1520308AFTER HOURSUSD55.24
%
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:
P/E Ratio
23.406779661016948Market Cap
10164130974.7696
Dividend Yield
1.448225923244026% Rev. per Employee
393080More quote details and news »expdinYour ValueYour ChangeShort position
[EXPD] and
Google
(GOOG) are high-quality names in the U.S. that we think are very reasonable today.

Let's hear what you like about them.

De Vaulx: Everybody is always looking at the new names and the new stocks that Berkshire Hathaway may be buying, and yet investors seem to be neglecting Berkshire Hathaway itself. Over nine months ago, Berkshire Hathaway announced that it was willing to do buybacks if the stock became too cheap. The formula is that they would buy back shares if the stock traded below 110% of reported book value, which is close to $115,000 a share for the A shares. So with the stock trading at $126,000, we think that the safety net is high and that the stock could not fall that much before the buybacks would kick in. We think of Berkshire as a collection of, by and large, good businesses. Some are a little more cyclical than others, but they are good businesses that they either own outright or in which they hold big stakes, including
Wells Fargowfc -0.26182579856868565%Wells Fargo & Co.U.S.: NYSEUSD57.14
-0.15-0.26182579856868565%
/Date(1481320814618-0600)/
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:
20215407AFTER HOURSUSD57.11
-0.03-0.052502625131256565%
Volume (Delayed 15m)
:
P/E Ratio
14.073891625615763Market Cap
287727756224.032
Dividend Yield
2.6601330066503324% Rev. per Employee
363241More quote details and news »wfcinYour ValueYour ChangeShort position
(WFC).

What's the catalyst?

De Vaulx: Historically, the intrinsic value of the company has grown year after year, so the value will be recognized as they keep building value. There may be a time, especially after Mr. Buffett dies, when they may decide to pay a dividend, so we would not worry about that. What we want to make sure of is that Berkshire's ability to add to its intrinsic value over time remains intact. But we believe the company will still be in good hands when Mr. Buffett is no longer with us, and we believe that the intrinsic value of the company is around $160,000 a share.

By our calculations, the stock is trading at around 15 times next year's profit estimate of $8,265 a share.

De Lardemelle: What that is not catching is the earnings on their equity portfolio, including
Coca-Colako 2.4890190336749636%Coca-Cola Co.U.S.: NYSEUSD42
1.022.4890190336749636%
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:
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%
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:
P/E Ratio
25.454545454545453Market Cap
176745057205.372
Dividend Yield
3.3333333333333335% Rev. per Employee
341469More quote details and news »koinYour ValueYour ChangeShort position
(KO). If you consider those earnings, the stock trades at closer to 11-12 times. What I also like about Berkshire Hathaway is that if there is a downturn in the equity markets, it usually allows it to grow its intrinsic value faster as they put more money to work. It is very unusual to have a business that grows in value as the economy or the stock market falls sharply.

What else looks interesting?

De Vaulx: Applied Materials is obviously a cyclical company. They deliver front-end equipment for the semiconductor industry and the solar industry, which is in a very deep downturn.

They've lowered their outlook for this year. Is that a big concern?

De Lardemelle: No, on the contrary you want to buy this stock when the cycle is down, and usually it gets the cheapest when the outlook is the murkiest, so it's not necessarily at the bottom of the cycle right now. But when the cycle is turning down and everybody throws their hands up, that is a good time to own it. We believe that this cycle in semiconductors will be milder than previous ones because there was less overbuilding of capacity.

IVA's Picks

Recent

Company

Ticker

Price

Berkshire Hathaway

BRK/A

$126,800

Applied Materials

AMAT

11.89

Expeditors International

EXPD

36.40

Source: Bloomberg

However, one negative for Applied Materials over the long term is that the buyers are getting stronger and stronger. There has been a huge consolidation in the semiconductor industry, so that's a negative. But the positive is there are very few companies that are able to deliver this type of equipment, they have huge R&D, the cycle will come back, and at the next peak we think the company will generate about $2.5 billion of Ebit [earnings before interest and taxes], compared with an estimated $1.4 billion in the current fiscal year.

What's the biggest risk for this company?

De Lardemelle: Timing. It's possible that if the downturn gets worse, you could see a stock trade as low as $9 or $10, versus around $12 recently. But the intrinsic value is closer to $17. Their type of manufacturing is not going to happen anytime soon in China. This company has unique technology, and they have handled the cycles well, they have a strong balance sheet, and we know they will get through this downturn.

Another pick, please.

De Lardemelle: Expeditors International of Washington. Obviously, size helps them because they get discounts with shippers. Expeditors has been recognized for its strong growth for such a long time in the U.S., and it grew in excess of global trade, which grows faster than GDP [gross domestic product]. That horse has slowed down because they are tilted very heavily toward the air-freight market, which is about two-thirds of their business. The air-freight market is a bit more volatile because when the economy slows down, people ship by sea. When it picks up, they need parts faster and ship by air.

So what's to like here–their business model?

De Lardemelle: Yes, their business is going to grow GDP, GDP-plus; it's never been so cheap on an EV [enterprise value]-to-Ebit basis. It's less than 11 times. And they have a very well-regarded management and an extremely strong balance sheet. They had been content to buy back stock to offset the creation of new shares through options. But now they seem to be willing to shrink the share count.

Their second-quarter earnings fell 12% owing to difficulties with their air-freight business. Is that a worry?

De Vaulx: We believe Expeditors' weak results were to be expected following weak second-quarter reports from other companies in the sector. On the positive side, Expeditors reported improving monthly volume trends throughout the quarter in both air freight and ocean freight and the company made a large share repurchase.